Your client and two of her associates agree to form a new business that will manufacture IT security hardware and software for the telecommunications industry. The three plan to do all the management of the business. The firm will also hire several employees in the areas of research and development, manufacturing, marketing, and financial analysis. To raise the necessary capital for the business, the three plan to have an additional 50 owners who will be passive investors in the business. All 50 have large amounts of passive income from other investments. One of the three managing owners has proposed that the business be formed as a limited liability partnership. Another wants to have a corporation or LLC. A third has suggested the limited partnership or LLLP.
#1-For these owners, why is the default management structure of either a limited partnership or an LLC appropriate for their objectives?
#2-The three managing owners want to make sure that all the passive owners are obligated to make additional capital contributions to the business as capital is needed. Therefore, the three managing owners want to make sure that the passive owners remain in the business for the entire 10-year term of the business, even if the passive owners want to leave the business. Which business form is best for achieving that objective? What attribute of that form makes it the best form for achieving that objective? And one of the owners suggests the corporation form be used rather than an LLC because the corporation has a life that is independent of the lives of its owners. Is that a reason to choose the corporation over the LLC?
